The Los Angeles Times is reporting that JPMorgan Chase & Co has decided to get out of the student loan business, citing competition from federal government programs, increased scrutiny from regulators, and lack of growth in the sector.
The whole thing reads like something out of an alternate universe. And anyone who buys their rationale should call me, because I’ve got a bridge in Brooklyn I’d love to sell to them.
Let’s look at the landscape, shall we?
Private Student Loans Are Money Makers For The Bank
Private banks haven’t been able to offer federal student loans since 2010. In the intervening three years from then until the time that Chase decided to pull the plug on their student loan activities, the private student loan market has exploded.
The cost of higher education has increased, to be sure. But more to the point is the fact that the ancillary costs of higher education has gone through the roof.
We’re talking about costs that don’t get factored into the university figures. Things like gasoline to get to and from class, food, rent for off-campus housing, and just day-to-day living.
Meanwhile, the caps on federal student loans have remains unchanged.
Faced with the gap between the cost of education and the ability to finance those costs, students are turning in record numbers to private student loans. We’re talking about a growth rate of 25% per year in private student loans.
But Only When People Pay Their Private Student Loans
Private student loans, as you see, are quite the moneymaker for banks. But when borrowers go into default, that profit margin shrinks quickly.
That’s exactly what’s happened to the private student loan market in the past few years. In fact, Moody’s says:
The default rate index for first-quarter 2013 was 4.0%, down considerably from 5.0% in first-quarter 2012. The year-over-year decline of more than 18% marks the fourth consecutive quarter of sizeable year-over-year improvement. The rate is still about 50% higher than pre-recession levels, but is an improvement from prior quarters, when it was about twice as high.
The 90-plus delinquency rate index was 2.4% in first-quarter 2013, down slightly from the same period in 2012. “Ninety-plus delinquencies will continue to decline slowly, as they have since peaking in mid-2009,” says Moody’s Fustar.
The PSL Indices track more than ten years of credit performance data on 71 private student loan securitizations that Moody’s rates, representing approximately $40 billion in outstanding pool balance.
Sure, the delinquency rates have fallen – but when 4.0% go into default and another 2.4% are 90 days or more past due, that’s got to hurt.
Private Student Loan Securitization Problem
Not only are private student loans becoming less profitable for JPMorgan Chase, but their business model is under the microscope.
Remember the whole mortgage securitization thing? You know, the one that led to millions of homeowners being foreclosed upon with shoddy paperwork and robosigning running rampant?
Well, hang onto your hats. In case you didn’t know, most of those private student loans are securitized as well.
That means most lawsuits brought by private student lenders and securitized trusts such as National Collegiate Student Loan Trust are at risk for the same sorts of defenses.
Loans Are Most Likely To Be Worthless
The last big securitization wave involved mortgage lending, which made sense to investors because there was a stop-loss position in place.
Don’t pay the mortgage and the holders of the paper takes back the house. Sell the house back on the open market and limit your losses.
For private student loans, however, there is no such protection. If you don’t pay your private student loan, the securitized trust needs to sue you. Once finalized, a judgment gives the holder of the paper nothing more than the ability to freeze a bank account or withhold part of your income.
Those collection activities may not yield much of a payout for the holder of the student loan, and it could take years to reap even a small amount of money.
At this point, not many private student loan borrowers are defending lawsuits brought against them by National Collegiate Student Loan Trust and other such entities. My office has been handling more and more of them over the past year or so, and the volume of cases is definitely picking up.
As more lawyers start practicing in the field of student loan law, I can guarantee that the private student loan securitized trusts are going to be in for a rough time of things.
Stand By For the Next Meltdown
JPMorgan Chase may be getting out of the private student loan business, but there are still lots of companies happy to dole out the dollars.
Sallie Mae, Wells Fargo & Co., and Discover Financial Services are going to keep making private student loans because undergraduate students are demanding the easy credit.
This, much in the same way that Countrywide and other lenders kept fanning the flames of the subprime mortgage industry until that came crashing in.
Ready for the next meltdown? Stay tuned, it’s coming soon.
Image Credit: Canadian Pacific